- Recognition of the economic situation
- Wage increase
- Exit from deflation
- Support for SMEs
- Expectations for Abe administration
Recognition of the economic situation
An overview of the world economy leads us to believe that Asia, including China, will act as a center of global economic growth in 2016 as well. Besides Asia, we think the United States will play a leading role in the world economy. The country raised key interest rates at the end of last year for the first time in nine year, and this indicates the strength of the U.S. economy. We think that the U.S. economy will achieve a growth rate ranging from 2.5% to nearly 3% this year, given the country's favorable employment and income pictures, low energy prices and solid consumer spending. And the European economy will continue to recover at a mild pace. Low energy costs, expansion of consumer spending on the back of an improving employment situation, and export growth fueled by the euro's depreciation will be among key factors behind the expected firm European economic trend. China's economic growth is slowing down but we expect continued growth at a pace of 6.5% or more per annum, buoyed by economic stimulus and policy measures such as credit easing, increased fiscal spending and structural reform amid the country's "new normal" state of slower but more sustainable expansion. Based on these assumptions, we think that the world economy as a whole will be able to attain a growth rate of around 3.5% this year.
As for the Japanese economy, the Abenomics policy mix program has entered its fourth year and is steadily causing favorable effects on it. Corporate earnings remain strong, aided by the yen's weakening and lower energy prices, and are expected to close the current fiscal year ending this March in better shape than the previous year. Meanwhile, we witnessed the realization of various structural reforms last year such as the broad agreement on the Trans-Pacific Partnership (TPP) free trade pact, the restart of nuclear power plants, the lowering of an effective corporate tax rate, and the adoption of the Paris Agreement at the COP21. Furthermore, Japan's business environment, which was once said to be saddled with a "sextuple whammy," is being improved, permitting us to expect faster economic growth this year than last year. The government has projected a real growth rate of 1.7% and a nominal rate of 3.1% this year. These are figures that should be achieved without fail and we think they are attainable.
On the stock market front, prices have been on the decline since the turn of the year. We think that this reflects concerns over China's economic slowdown and the increasingly intense Middle East situation. But it does not follow that the stock market downswing represents a major deterioration in the world's economic fundamentals. We think it a temporary trend. We expect Japanese stock prices to recover the 20,000-point level on the Nikkei index mirroring favorable business earnings. We believe the Japanese economy has that much fundamental strength.
Regarding risk factors for the world economy, concerns exist over the impact of the U.S. interest rate increase on emerging economies. However, both the timing of the rate hike and its size were what had been expected, and we think its negative effects will be limited. We don't see the U.S. rate hike as a major risk factor.
We are not pessimistic over China's decelerating economic growth. We expect the Chinese economy to maintain growth of a medium to high speed toward 2020. We met with Chinese Premier Li Keqiang last year during a visit to Beijing by a delegation of the Japan-China Economic Association and heard directly from him about his definite idea regarding the country's economic prospects. Premier Li showed his strong resolve to push ahead with structural reform under the 13th Five-Year Plan through 2020, seeking to shift China's economic structure from a pattern led by investment and exports to a domestic consumption-driven one, while promoting the restructuring of state-run enterprises. We sensed his strong confidence in realizing a medium-to-high-speed growth rate of 6.5% or more.
Concerning geopolitical risks, we are worried about terrorism and the Middle East situation. These are not the sort of thing we can predict. Should simultaneous terror attacks like the 9/11 assaults occur, of course they would possibly have a major impact on the world economy. However, the international community is stepping up cooperation in forestalling terrorism, and is strengthening its system for the purpose. We would like to see good effects from such international efforts. On the Middle East front, we hope that Saudi Arabia and Iran, both big powers in the region, will resolve problems through dialogue and continue to play a positive role in ensuring regional stability and prosperity. Japan depends on the Middle East for more than 80% of its crude oil needs and will be inevitably affected in the event of contingencies in the region. We want the Japanese government to continue diplomatic efforts for dispute resolution there.
The year 2016 is going to be a very crucial year for the Japanese economy. The nation is heading into a critical stretch to exit deflation and achieve economic rebirth. The key to realizing these targets is the expansion of consumer spending, which accounts for 70% of gross domestic product (GDP), and of private-sector capital investment. And a major driving force of consumer spending is wage increase. Keidanren called on its member companies in the past two years to raise their wage levels. As a result, an average wage increase of more than 8,000 yen, or more than 2.5% per month, was achieved during last year's spring round of labor-management negotiations. Both sides also agreed on high-level bonus and other lump-sum payments.
We are scheduled to publish an annual report by the Committee on Management and Labor Policy in mid-January. We will indicate Keidanren's stance toward wage increase in the report. Specifically, we will seek a positive response from member companies to wage increase commensurate with their earnings while keeping in sight the path to a nominal growth rate of 3% toward realizing a strong economy. Namely, we would like to urge companies chalking up better earnings to consider, in a proactive and drastic manner, wage increase in excess of last year's results on an annual income basis combined with expansion of capital investment, R&D spending and employment. We hope to improve an environment for higher pay centering on major companies by calling on member firms to show a positive response.
We called for basic pay-scale increase for two years in a row. In the committee's report last year, we cited it as one of the important choices for member companies. Some companies realized pay-scale increase without much resistance and others made strenuous efforts for the purpose. Profit situations are diverse according to business lines and conditions, so that we would like to leave final decisions to individual companies. We hope member companies will consider taking extra steps to raise their pay levels on an annual income basis. Whether wage increase is realized or not becomes the key to expansion of consumer spending and, in the long run, to a positive economic cycle. We expect to put all energies into achieving this goal.
Exit from deflation
We are not sure of an exact time as to the Japanese economy emerging out of deflation but think it will be realized within this year. The key to this is wage increase and the expansion of capital investment. An exit from deflation depends on the extent to which the business community can achieve these targets. While we aim for wage increase in excess of last year's levels, we think it possible to expand capital investment from about 70 trillion yen in 2015 to around 80 trillion yen in 2018 if the domestic business environment is improved. We showed this prospect at last year's dialogue between the public and private sectors, and listed nine items as conditions necessary to improve the business environment. The effective corporate tax rate was reduced to the 20% range last year, a year ahead of schedule. We also saw other valuable achievements, including the nuclear power plant restart and the TPP agreement. If the business environment is improved steadily, capital investment is certain to expand and we will be able to exit deflation. Keidanren will maximize its own efforts and continue urging member firms to switch over to an aggressive management manner.
Support for SMEs
The issue of ensuring fair prices in business deals was an important topic at last year's government-labor-management meeting. An agreement reached at the meeting includes two points in this connection; the need to ensure fair prices in business transactions by passing on higher costs of raw materials and other factors to such prices, and the need for major companies to assist small and medium-size enterprises (SMEs) in boosting their productivity. Keidanren expects to call aggressively for cooperation among its members in these respects through meetings with regional economic groups and other occasions. Furthermore, we will refer to the issues of fair pricing and support for better SME productivity in this year's report by the Committee on Management and Labor Policy. We will continue to ask members for a positive response on various occasions. In addition, we expect trickle-down effects from major companies enjoying higher earnings to SMEs.
Expectations for Abe administration
We wish the administration of Prime Minister Shinzo Abe will evolve its growth strategy toward an exit from deflation and economic rebirth. Implementation of the strategy is indispensable to pave the way in a specific manner for the government-set goal of expanding Japan's nominal GDP to 600 trillion yen. It is most important to set aside budgetary appropriations to promote the growth strategy.